July 1 (Bloomberg) -- U.S. mortgage applications fell last week by the most since February, defying efforts by President Barack Obamaâs administration to revive the housing market.

The Mortgage Bankers Associationâs index of applications to purchase a home or refinance a loan dropped 19 percent to 444.8 in the week ended June 26 from 548.2 the prior week. The groupâs refinancing gauge declined 30 percent to the lowest in seven months, while the index of purchases fell 4.5 percent.

Unemployment, which touched a 26-year high in May, and rising borrowing costs discouraged homeowners from refinancing, while a growing number of foreclosures sidelined potential buyers waiting for house prices to stop tumbling. Pending home sales showing contracts signed in May rose 0.1 percent, compared with a gain of 6.7 percent in April, the National Realtors Association said today.

âThe run-up in mortgage rates is exacting a toll in terms of depressing mortgage applications,â Brian Bethune, chief U.S. financial economist at IHS Global Insight in Lexington, Massachusetts, said in an interview. âThe economy is in a phase of attempting to find a bottom. Anything that comes in the way of that, like higher rates, is going to mean it takes longer.â

Barriers to Recovery

Home loan rates climbed above 5 percent the week of May 29 for the first time in three months, according to mortgage bankersâ data, and have remained elevated relative to 10-year Treasuries.

The percentage of people who said they plan to buy a home in the next six months fell to 2.7 percent in June from 2.8 percent in May, the Conference Board in New York said yesterday.

The mortgage bankersâ refinancing gauge decreased to 1,482.2, the lowest reading since November, from 2,116.3 the previous week, todayâs report showed. The purchase index fell to 267.7 last week from a two-month high of 280.3.

The share of applicants seeking to refinance loans plunged to 46.4 percent of total applications last week from 54 percent.

The average rate on a 30-year fixed-rate loan fell to 5.34 percent from 5.44 percent the prior week. The rate reached 4.61 percent at the end of March, the lowest level since the groupâs records began in 1990.

At the current 30-year rate, monthly borrowing costs for each $100,000 of a loan would be $558, or about $62 less than the same week a year earlier, when the rate was 6.33 percent.

Mortgage Rates

The average rate on a 15-year fixed mortgage dropped to 4.81 percent from 4.93 percent the prior week. The rate on a one-year adjustable mortgage decreased to 6.52 percent last week from 6.54 percent, according to the mortgage bankers.

Home loan rates tracked by McLean, Virginia-based mortgage buyer Freddie Mac climbed along with Treasury yields through late May and early June on investor concern that a greater supply of government debt being sold to fund federal spending would fuel inflation.

This year the Federal Reserve purchases of mortgage bonds guaranteed by Fannie Mae, Freddie Mac and Ginnie Mae brought down the yields on those securities, allowing lenders to reduce rates on new loans and still sell them at a profit.

Still, rising foreclosures that sell at discounted prices are flooding the market and depressing home values, according to Lawrence Yun, chief economist of the Chicago-based Realtorsâ group. This year the number of foreclosures may rise to 2.5 million, the highest on record, Yun said.

Lower Prices

Existing U.S. home sales in May rose 2.4 percent to an annual rate of 4.77 million, lower than forecast, and the median price was down 16.8 percent from the same month in 2008, according to the Realtors.

It would take about 9.6 months to sell the nationâs 3.8 million unsold homes at the current sales pace, according to the Realtors.

âThe worst is behind us but weâre a long ways off from a recovery in housing,â said Mark Vitner, a senior economist at Wachovia Corp. in Charlotte, North Carolina. âInventories are still elevated. Weâre not expecting any strength in housing until the second half of 2010.â

About 20.4 million of the 93 million houses, condos and co- ops in the U.S. were worth less than their loans as of March 31, according to Seattle-based real estate data service Zillow.com.

Builders Struggle

Builders including Los Angeles-based KB Home are slashing prices and reducing the size of houses to compete with foreclosures.

KB Homeâs revenue fell 40 percent last quarter to $384.5 million and net orders dropped 31 percent to 2,910 homes, the company said June 26.

The Washington-based Mortgage Bankers Associationâs loan survey, compiled every week, covers about half of all U.S. retail residential mortgage originations.

I have a friend who was going to move to a larger house (he has a growing family and his present house is getting too small), but when he found out interest rates had gone up close to a percent since he did his calculations a couple months ago he has put his plans on hold.

I did advise my friend that I think he will likely get another chance at the lows in interest rates sometime in the next year or two. Bonds have already started back up, and this trend will only accelerate as (IMHO) the economy hits more bumps and risk aversion increases. If nothing else, the government knows the importance of housing sales to the economy, and will eventually find a way make them occur. They will buy back bonds to keep interest rates low if this does not happen on its own. This year they are offering $8000 to first time home buyers. Who says they won't offer $20,000 to anyone who buys a new home in 2011?

The only way we get out of this mess is through what I call the 'Hyundai-Saturn-Sears Economic Initiative.'

Green shits!

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Not to get off topic here but I gotta defend Hyundai's.

Are you saying Hyundai's are shit? Actually, they are very good cars. I have a 2000 elantra with 173,000 miles on it and it still runs like a top. Every person I've known that has owned a Hyundai has loved their car. Every person I've known who has never owned a Hyundai has told me how "shitty" they are.